11 financial planning tips for the self-employed worker

14 January 2016
by
National Bank

Did you plan to work for yourself after settling in Canada? As a
self-employed worker, your income will be more sporadic than if you
have a salaried position. In addition, you won't have an employer to
withhold taxes from your salary; you will have to do it yourself.

To avoid headaches and to determine the amount of provincial and
federal tax you will owe, it is important to properly plan your finances.

Below are 11 tips provided by Hassan Moussa, Personal Financial
Advisor at National Bank, which will help you start off on the right
foot with your financial planning.

1. Make a budget. A budget is the best tool for planning income
and expenses. With a budget in hand, it will be much easier to weather
the feast-or-famine reality that many self-employed workers face.

2. Build an emergency fund. Ideally, you should keep a cushion
that would see you through a dry spell of three to six months. If you
don't have enough liquidity, apply for a bank line of credit.

3. Consult an accountant and financial planner. Don't hesitate
to call on experts to help you manage your business and personal
finances. They can help you calculate the amount of taxes you owe,
plan for retirement, etc.

4. Pay your income tax in installments. When you receive a
payment from a client, it's a gross amount. It's easy to forget that
you will need to pay income tax on that amount. With the help of your
accountant, calculate your provincial and federal taxes and make
instalment payments every three months. This will keep you from
spending money that isn't actually yours.

5. Set aside funds for sales tax payments. As with income
taxes, it's important to remember that a portion of the money you earn
includes sales tax that you must repay to the government. Deduct the
amount owing from your payments and set the difference aside so that
you are able to pay it to the government when required.

6. Build your savings. Given the ups and downs that come with
working for yourself, it's easy to forget to save. Set up an automatic
savings mechanism that will force you to set funds aside for
unforeseen expenses and retirement.

7. Plan your retirement. Retirement planning is particularly
important for self-employed workers as they cannot count on a pension
plan from their employer. Consult your financial planner to ensure
that your golden years are secure.

8. Maximize your RRSP and TFSA contributions. Since you don't
have access to a company pension plan, it is crucial that you
contribute the maximum amounts allowable to your registered retirement
savings plan (RRSP) and tax-free savings account (TFSA). Doing so will
help your tax situation and facilitate your retirement.

9. Don't claim unnecessary deductions. You may be tempted to
deduct as many expenses as possible to reduce your taxable income and
pay as little income tax as possible. However, this short-term
strategy often causes problems for self-employed workers who wish to
buy a home or obtain financing for a major project in the future. If
you lower your income significantly by claiming numerous deductions,
it may be difficult to convince financial institutions of your ability
to repay loans. To prevent this from happening, don't overdo it when
it comes time to deduct your expenses. For example, you may be allowed
to deduct the purchase of your car, but if you don't really use it for
work, it may be best to avoid doing so.

10. Separate your business finances from your personal
finances. If you chose to register your business as a sole
proprietorship, there is no real distinction between your personal and
business finances. Nevertheless, it's best to keep them separate, as
it will simplify things when it comes to managing your finances. It
will also make it easier to talk to the bank about your personal
financial situation and that of your business.

11. Take out sufficient insurance. Your income hinges on your
ability to generate it. If you were to suffer a critical illness or
disability, you could be in serious financial trouble. It is therefore
crucial that you take out disability and critical illness insurance.

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